Wix.com Ltd. (WIX) Earnings Call Transcript & Summary

Good morning. Thank you, everyone, for joining us today. This is Nat Schindler with the Bank of America Merrill Lynch Internet team. I'm the mid-cap analyst. And I have the pleasure to interview the Wix team from Israel. We have Nir Zohar, COO; and Lior Shemesh, CFO, of Wix.

And let's just jump right in with looking back at your last quarter, guys. You guys obviously saw a surge in subscriber demand as SMEs and prosumers moved online from what was going on with the COVID pandemic. Can you tell us anything about the makeup of these cohorts? And any differences in geography, sector or behavior from previous cohorts?

Nat, it's Nir. So I think generally speaking, we didn't see any notable difference. I mean we're talking -- I think we should be talking about the time frame, and it is also something that we covered on our earnings, we're looking, I would say, at 3 different periods of time. There is Q1 up until mid-March, which is a very standard as expected behavior of our Q1 numbers. And then we have the last 2 weeks of the quarter, which is the last 2 weeks of March, which I think were weeks of turmoil. And then at least in terms of what we've shared so far, naturally, we're in mid-quarter, but we did share in earnings the numbers for April. And that's where we see a big surge that is very, obviously, 100% related to the Corona pandemic. I can say that only in these first few weeks, you can see a difference, which was around the cadence in which countries went into lockdown. So in fact, for us, the earliest and biggest indications were -- was the behavior of our traffic and the cohorts coming from Italy and from Spain. But once the U.S. moved into the same lockdown method that everyone else did and pretty much everyone else around the world is in that kind of somewhat lockdown state, we've seen pretty much across the board the same behavior. But the behavior is, as you said, is a huge, huge shift of businesses moving online. So I would say that from being in a position where having an online presence and being able to transact, communicate, sell online, being something which was somewhere between the nice to have to a great expansion of my business before March 19. I think that what we've seen in April that this has become mission-critical for almost everyone. And for those people, there's a huge shift. And I have to say that the way we perceive it, we cannot foretell the future. We don't know when will lockdown be lifted, when will people go back to normal? Will there be -- how big of a financial impact it's going to have on different countries? Will there be another round of this pandemic? But I think that regardless of that, the way we perceive this shift that we've seen from the online to a business being -- online business being mission critical for the small businesses, we think about it as an acceleration of a trend; though, a process and a paradigm change that I believe would have taken probably 5 to 7 years has happened almost within 2 or 3 weeks. But I think this change is here to stay. So the length of the pandemic, the length of the lockdown, the length of the financial crisis that is going to follow may vary, but I don't think looking at how digital behavior and also looking at the consumer behavior where the people are transacting with those businesses, I think this is changed and here to stay.

You shared a lot of April acceleration numbers on your call and that was great to see obviously, that's related to the lockdown, but do you have any data talking about how well -- how much time those users are putting -- those new users and even old users are putting into developing their web pages? How much effort are they putting in? As because of lockdown, do they have access time that they are working on it and I mean this for both the subscribers as well as the free cohort?

Yes, sure. So I don't have numbers here to share -- I don't have the exact numbers here to share, but I can tell we definitely observed people spending more time on building their businesses, but not much more time, because the change in behavior and surge in traffic, and people coming to look for services also comes with a much higher intent, which makes sense. Because, as I said before, it's mission-critical, I need to finish this in order to start selling in order to transact in order to just plain and simple, make a living. So there is -- I would say there's an uplift, but it's not dramatic because they need to be able to ship and go to market as soon as possible.

I would just add that about -- because you also asked about existing customers. And the other thing that we actually noticed is increasing conversion of existing customers. And this is kind of interesting because it's kind of related to what Nir mentioned before and the reasons about understanding of people that they need to move online and faster than actually they planned. But what we've also seen a quite a kind of significant increase in conversion from older cohort which obviously also contributed to the overall numbers.

And those older cohorts that convert from free to paid, obviously, if they're going to pay their business as opposed to many free users your site that might have been making a wedding page or something. How have you seen these people who stay as free using -- who are clearly businesses, using your page? And how has it been changing over time? And I know you're saying that recently, they're converting at a higher rate, and that's what happened during COVID. But how has that been changing over time? And why would they stay on your free site -- your free offering?

When you ask why stay in the free is, why wouldn't they convert to premium as well?

Yes, that's what I mean versus, obviously, the $12 to $14 a month. But what are the major factors that take those people that stay -- businesses, clearly, businesses that stay at the free for a long period of time and eventually now convert it? What changes this?

Well, I think there's a few different -- I would say, a few different cases here that can be accounted for. I think that if you look at the older cohorts, some have had -- they had a business that was mainly an offline business, and they never really fully developed the online side of it. Restaurants, which the main business is, there's people coming in and ordering food and sitting down for dinner, and it's -- they reserve seats. And that's the main business of the restaurant. So the hassle of trying to also deal with deliveries is not necessarily something that they cared for. In this example, naturally, as soon as they sit, as the coronavirus -- as the pandemic hits and people go to the shelter at home, suddenly, you must do deliveries, you must take out. Most of the communication that we're going to have with you is not on -- in the restaurant itself, but remotely. And now suddenly, it's critical to have an online presence. So you might have had a free website for a while, and you were tinkering with it, but were never serious about it. Now you've got to be serious about it. But I would say that the flip side of businesses now that are already registered and are still free and haven't become premium, is that these people are trying to innovate. They're trying to reinvent themselves. Sometimes, it's easier. Sometimes it's a restaurant [Audio Gap] sometimes it's a fitness trainer that used to do face-to-face training in a store or at your house. But the other [Audio Gap] okay? You can't instruct people how to cut their own hair over Zoom. So you really try to reinvent yourself [Technical Difficulty]

Shemesh, are you there? We're having technical difficulties. I don't know if everybody else is? Nir? We've lost audio on our end. But it sounds like people can hear me. Unfortunately, it seems the Wix team is -- the connection with Israel seems to be slightly spotty. Moderator? Nir?

Nat, it's Joe. I was dropped too, for some reason, but I've just dialed back in.

Oh, it's great. Well. Everybody, Joe Pollaro is VP of Investor Relations here. And until we have our Nir and Lior from Israel, I might want to just go asking Joe some questions, if that's all right with you, Joe?

Yes, yes. Sure.

Can you talk a little bit about what you guys mentioned in the call and about the upsell changes that have been occurring, your ability to move not just the businesses to become subscribers, but to become more advanced subscribers adding e-commerce packages and the like? How has that changed through the pandemic? And how do you see it evolving over time?

Sure. So we've definitely seen an increase here since March and in April. Far more subscriptions are now being added with the business functionality that we offer. So that's a vertical application like e-commerce, which has been the most popular one by far, but also restaurants bookings, et cetera. It's a type of subscription package that is selected. It's obviously priced higher and we're seeing more of those being selected here. And then beyond that, we're seeing increasing penetration in business-type applications that are needed. Ascend is one that we talked about, our marketing and CRM application. The purchases of that were up over 130% year-over-year. And Payments has also been up, obviously, as businesses get online and need to take payments online to substitute for in-person. So these are certainly indications of more and more businesses coming to it and building sites with more features attached to them. And I think it's just a sign of the times and also the breadth of our product offering that businesses are needing more functionality online.

On your Payments business, are you doing a significant amount of Payment volume yet? And if you are -- if you are not yet doing that much Payments volume, is that more the gross merchandise volume on your sites or it's still relatively low compared to, let's say, a Shopify, which are true e-commerce-only businesses? Or a -- or is it because you -- there were always other options in at least most countries for payments even after you use it and people are continuing to use those such as credit card and the like?

Yes. Look, I mean -- so first of all, Payments is something -- Wix Payments, I should say, is something we just started offering early in 2019, so a little over a year ago. Obviously, we provided the ability to take payments on Wix for many years. But through other providers, like you mentioned, some very localized, but also PayPal, Square, et cetera. So we've always had businesses transacting, but Wix Payments is a product that we've offered and thus being the payment facilitator is new. So our overall GMV on Wix is large and strong and growing. And keep in mind, it's not just e-commerce. It's not just stores, it's also service providers. It's event planners, it's restaurants, it's hotel owners, et cetera. All of these types of businesses are able to use Wix Payments, and do. The GMV for Wix Payments itself is smaller, obviously, as a percent of the total because it's newer, but it's growing very fast, and the penetration is increasing rapidly. So I don't want to give any guidance on what it will be in the future. I mean, obviously, comparing this to Shopify is something that I think a lot of people do and think about. The thing I would caution is that Shopify, obviously, is 100% e-commerce, whereas we obviously are not. And our focus, historically, has been on smaller businesses. I think we are expanding into larger businesses now. But historically, it's been smaller businesses. So the base is a bit smaller. But it's been growing very strong. The penetration in Wix Payments is growing very strong, and I think it will continue to be a driver of growth.

And is Wix Payments being used more heavily in particular geographies where you -- other payments options historically have been more difficult?

I mean I think payments is difficult in a lot of areas in the world. But certainly, in Europe, we've seen strong uptake. And while it may seem simple, payments in Europe is actually quite complex, and Brazil as well is a country where payments is a problem, has been a major pain point for lots of businesses for many years, and we've partnered there with [ Stone ] and Wix Payments has been pretty successful in Brazil as well.

Hey guys, we're back. Sorry, we got some technical issue here, but, it sounds like Joe has been doing a tremendous job.

Joe stepped right in to help out when we had technical difficulties, problems with a Corona conference, I think.

I just want to add, Nat, about Payments. Obviously, we saw a really significant increase in GMV. We don't provide the number of GMV for obvious reasons, but it's more than 2x on a year-over-year basis. And I think that what is interesting, it's growing so fast. And it's not just because of the epidemic. I think that we need to remember that the Wix Stores today is a much more comprehensive solution than it has ever been. And we are adding much more capabilities, features and new products to this platform. I think that if we are going to look kind of the future, the near future, I think that, obviously, that will be increasing much more than all the other stuff as part of the business solution. Obviously, I believe that it will be also #1 part of the business solution. But this is something that we think significantly much, but again, not just because of the epidemic, but also because of the product itself, which right now is growing much more significantly because of what is going on. But I think that overall, it's something that obviously is very strategic for us, but it's become quite big.

Lior, that actually segues well into another question, and this would be great for you. Can you walk us through -- and one of the reasons people care a lot about payments is obviously the impact on gross margins. Can you walk us through the various puts and takes that you're seeing on gross margins? And I think you have guided to gross margin staying relatively flat this year. What can we expect on a longer-term basis in your business?

Yes. So this is why we divided the P&L into 2 or at least the top line and gross margin in order to provide like more understanding about what is going on. And you're absolutely right. There's a significant impact on gross margin. If I may start with the creative subscription, so we said that it will be, gross margin around 80%. I think that it's quite solid. I don't expect much of changes over there. I think that, by the way, over time, it may actually increase because of moving more to pros, agencies and so on. So I believe that this is something that is going to be stable, perhaps also a little bit increasing in the future. With regard to the Business Solution, today, there are a few components over there. The first one is G Suite, the second one is Payment, the third one is the Ascend, and the fourth is like many, many other stuff and by the way, also growing quite fast. And some of them, perhaps, in the future will be more significant. But let's concentrate on the first 3. I believe that G Suite will continue to increase, perhaps, a bit more than subscription, but more or less in line with the growth of subscription. I believe that Ascend is, let's take, for example, what is going right now. I think that when you have a business, if you want to communicate with your customer, you want CRM, you need a CRM actually. So it's growing faster than the growth in subscription. But Payments is growing much faster than both of them. Because think about it this way, it really depends on the level of GMV of our customers and it's accumulated. So I believe that -- I'm not sure exactly when it's going to happen, but it's going to happen quite soon, where payments become #1. Since Payments is come with a lower gross margin, it's going to decrease the gross margin of the Business Solution, but it's going to increase in dollars, the free cash flow, obviously, because it's all incremental. So this is what I expect. But again, we see more and more -- and you spoke about it, more and more business application and so on, and most of them are using, at least for the new one, using Payments. So I believe that, that will be increasing quite a bit in the future.

Great. And Nir, earlier, you talked about how you believe this was a permanent change towards online adoption by businesses. Can you talk about anything you have seen across the various geographies, especially across geographies that have opened up more? Has there been any change in behavior since then? Are people still coming to your site? Are they -- at elevated rate? Or have things dropped back down to more normal trends?

Well, so I -- first of all, again, it's across all geographies. There's not -- I don't think something, at this point, stands out significantly different to any other. I would say without going into any other Q2 numbers, except the ones we gave about April, naturally, which are already -- we have already shared on the earnings. But I can generally say that at least at this point, we are seeing similar behaviors even after April. So it has not subsided. And again, it's really hard for me -- really hard for me to say exactly what the behavior is going to be going forward because this is so abnormal. I think -- when I think about the history of our company and the history of our business, this is the fastest change that we've ever seen in terms of the magnitude of a change in a very, very short amount of time, maybe only when we just released the first product for the first time ever. So naturally, if something changes so fast, it's really hard to say where will it settle down. And will they -- and how exactly? Which is also, I think, a big part what we were trying to convey in our thinking about the future and why we are not giving annual guidance at this point. But I think, first of all, it's clear that this has elevated our business in this -- for this year, for sure. You also have to remember, it is still a premium model, and these are still cohorts with a lot of value. So whenever we bring in much bigger cohorts at high -- with high intent and high conversion rates, then naturally, this also has a big impact on us going forward, not only for the next few months, but for the next few years. So I think that in that aspect, we're definitely seeing a very strong trend in our business. If you have -- if I have to guesstimate, and truly, this is a guess, this is not -- this is -- nobody can tell. Because, as I said before, so many moving parts around the length of the pandemic, whether it's going to be a one-off? Or it's going to be another outbreak or a mutation or -- and also what will be the behavior -- the financial behavior afterwards? There's -- I think there's very clear signs of -- that the economy will not bounce back immediately in terms of unemployment rate, recession. Now I have to say our platform for the same reasons that it's so effective in this pandemic is also very effective in a financial crisis because people who lose their jobs, people who lose their business, cannot stay at home. They have to try and find something else to do. So they do try to reinvent themselves, they do try to go and open up a new business or a new initiative. And naturally, especially now online and online presence is going to be a key factor even the cornerstone of what they're going to do. So in that aspect, I would guess that there will be maybe some -- there will be some decrease over time because people will go back to online and operating -- sorry, to off-line, and they're operating also the off-line part of their business, is going to take some of their time. But the way I see and what I see in the user behavior today, I find it almost impossible to believe that someone who's expanded and uncovered really effective new facet of their business online that expands their business, that brings them a really good revenue source, is going to give that away completely when the pandemic is over and people can go back to their normal lives. I think that we were lucky that this pandemic hit now and not 10 years ago in terms of the abilities that have been unlocked for all of us as people through online. So imagine that this whole thing would have happened 10 years ago, how harsher it would have been because of the lack of the right tools and platforms to be able to support ourselves through online. I think that people recognize that. The online has become a fundamental part of what they do. So I have a strong belief that this is here to stay.

Great. Let's move over to your marketing impact, both what you're thinking of the opportunity in this business as well as what -- how marketing has been affected and the cost of marketing has been affected as other businesses have struggled? So on the last quarter call, you actually suggested it wasn't really a big drop in marketing cost, but you were getting -- you were able to get more for it. Can you walk us through a little bit of what you expect for the rest of the year?

Yes, I think marketing costs online is driven by competitive activity, right? So when people bid for traffic, obviously, the cost is determined by the number of the bidders. So yes, I think we've seen some decrease around certain channels, also in a changing manner because companies are going in and out in how much they spend and put online. And we did see some favorable rates and changes that obviously we're glad to take advantage of because our marketing -- well, from -- our marketing team was geared up and ready to go. We had the balance sheet to support it. And also, we have a great formula that calculates -- in which we calculate the investment per -- versus the return time, what we call the TROI. So in that aspect, I think we managed to move fast and be aggressive. And you have to remember, it was all, first and foremost, supported by a huge surge in demand, a huge surge in the people who are coming to us organically in some form or manner, whether they're looking for search terms related to us or going directly to the platform because of the strength of our brand. So I -- what is going to happen in the second half of the year in terms of behavior of other companies and how will that impact the marketing cost? I think it's impossible to project that. I would say that given the recent behavior, I would believe that we will still have some favorable and be able to be more aggressive for a while now. But it's really hard to predict when will that -- when and by how much it will change. Again, you have to remember that people are coming with a much higher intent. It means that even in the before -- acquisition cost of pre corona, we can still be more aggressive.

Last question for me before I turn it over to the audience. [Operator Instructions] But Nir, can you talk a little bit more about the opportunity in the professional side of the market? And also, this move from you last year into the professional side of the market, this a pretty big change in strategy from a company that's really -- you were always focused on the do-it-yourself first. Do you think the do-it-yourself market is getting near saturation? Or is there still a lot of growth there as well?

Well, lots of parts to this question. But first of all, I did not think that it was in saturation before. And obviously, now after corona has hit, it's clear-cut that there's no saturation. When you think about it, we -- on average, we were adding roughly 2 million registered users a month for years now. That was pretty much the attach rate of new registered users on a monthly base. April, that number went up to 3.2 million. It's a big, significant increase. Naturally, there is demand, and people are looking for solution. I think when you look at our shift towards more professional crowd, you say it's a change in strategy. I would actually not describe it as a change of our strategy. I think it was always the next step in our strategy. We always wanted to be a platform, a web development platform, a place where everyone can go in and find what they need. It was originally easier for us, and it was the path of less resistance to try to go after the DIY market, because it was so -- it was really fragmented and not -- nobody was giving a really good solution there. And I think that was our key success. We expanded that offering with ADI that actually went the other direction to even simpler user and the people who are even less tech savvy. But then if you think about it, then we went and started and we announced Wix Code, which now we call Corvid, which was, the coding environment clearly aimed towards the professional crowd, and it's a fundamental part of what we want to do with and how we want to work with professionals. And then I think -- and then last year, we felt that we were maturing to a place on both the platform and code to go much deeper into the professional crowd to understand their specific needs. It's important to understand, for many years, we've had many, many thousands and tens of thousands of designers and agencies working on Wix, but they were using the DIY solution, and we never catered to a very specific need. And what we've done in the past year, 1.5 years is digging real deep. Also now once Corvid was in place, to try to fully fathom what are their special needs. What are their specific needs? Things that can really unlock our platform for the future for them. And -- first of all, we've done a lot of changes throughout that year in adding more capabilities, solving ability to do various things on more of a batch level and running directories and now they upload and use media items and a long list of -- I don't want to bore you guys with all of it, but a really long list of features and capabilities. But we also garnered enough information to understand what should be the next step on the professional side as more of the technology itself. And this is also why we came up and are delivering Editor X, which is going to be the core of how professionals are using our platform. Obviously, it will also incorporate Corvid because this is fundamental to whomever wants to build something, which is not a generic website. It will be coupled with all of our current vertical services. So the e-commerce, the bookings, the restaurants, et cetera, et cetera. It will be coupled with Payments. And it will actually be a suite of capabilities that doesn't -- that includes more than just Editor X, but other things that we know these agencies need, capabilities around how do you manage a team on Editor X. So you can run an agency, what kind of permissions and capabilities we want to attach to someone who's an admin in the agency versus a designer in the agency versus capabilities, you actually want to hand over to the client himself, how do you manage billing of multiple accounts. There's a long list of things that they need, and we're going to incorporate that as a full suite of capabilities that is going to be around Editor X. When you think about it, I don't think there's any other platform on the globe that has such a rich and deep offering for professionals with what we are offering with Editor X. And I think that in that aspect, we are becoming attractive to the crowd, which is currently going and using Adobe in many aspects. And I think that's a great -- that's another great path for our future and a big part of our strategy.

Great. Let's turn it over to the audience. And are there any -- moderator, are there any questions in queue? Moderator, are there any questions in queue? Okay. Well, let's go on from there. We only have 5 minutes left. So can you talk about -- how do you position well against something like Adobe, obviously, a much more expensive product than you guys have been running? And what are the other real competition that you're seeing in the Editor X professional side of the market? And is it significant -- is it some of the same players that you see historically in the do-it-yourselfer market? Or is it a broader swath of and you're coming in with a lower price point?

Well, I think that the competition is probably different. And again, I was thinking about the agencies and the designer houses themselves as the competition. Actually, in this case, I think about them as the partners because the platform is what's supposed to serve them when they go out and build the website for their clients. In that aspect, I would say that there's a different kind of a landscape, probably much, much, much smaller companies that are private such as Webflow, which I think has a beautiful product. They are doing a great job, but are much smaller technology house than we are and have less in terms of the surrounding services around like the things I just mentioned, maybe also Ascend is worth mentioning in that aspect. So then again, Corvid and Ascend and Payments and e-commerce, et cetera, et cetera. And even Editor X, I think, allows more -- it still allows the same flexibility, but it also allows the shortest time to finish a project, because it does have -- allows you some UI control of the browser, that doesn't require that you write code for everything. I think that if I look at Adobe, maybe it's not a clear-cut competition because it's hard to say that they may have a full-blown offering, which is exactly the same as ours to compete on. I would say probably, yes, we're not ready to reduce pricing. It's going to be soon -- very soon when we do the launch in the summer. But I would assume that in most -- in many cases, we are probably going to be more affordable than they are. But also, I don't think they have the full-blown offering that we do. I think they do a great job in other areas for the designer and for the creators. But we -- I think we're closing a gap that is in the market there even versus companies like Adobe.

Great. And I think last question before we can let you go and go on to the rest of your calls for the day, and thank you all for doing this. But Corvid, well, 2 parts to this question on Corvid. One, can you give us any update on revenue impact of monetization of Corvid and when we're going to really see this as a driver for the business? And secondly, have you at all considered changing the name now in that pandemic world? Sorry.

So for the last part of the question, the jury is still out, but we'll let you know. I definitely see where you're coming from. In terms of the monetization, you have to think about it. So Corvid is already monetized. It's already driving an upside to our business because all the work we've been doing with the agencies with our partners would not -- not all of it, but a big chunk of it would not be available to us without Corvid, simply because they would not be able to do anything which is not within our Editor. So if it's not a business functionality that we envisioned before, if you don't have Corvid, if you're not using Corvid, you cannot do it. You cannot introduce anything new into a website. If you're a DIY user, in many cases, that's fine. But if you're a professional, then that's a really big disadvantage. So I would say, you already see that contribution. The next phase of that contribution is, obviously, is going to be Editor X because it's the next level, the next elevation of the work we're doing with the professionals. There it's going to be even more mission-critical because Editor X, by definition, is something that's going to enable the agencies, the designers, to build websites that are much more complex, much more geared towards building some of -- an enterprise solution website. Naturally, that's where Editor -- sorry, where Corvid is going to come into big play. So I would say that the way we perceive it, it's already contributing. And it's fundamental to the next step of our strategy, which obviously will also have a contribution on the financial side because it's going to be priced separately and I can definitely say much -- what would be a higher price point than what you see on the DIY solution today.

Well, everybody, we're at time, and I want to apologize for any technical difficulties we had. We're still learning on this. But gathering -- having a management team in from another continent without having to fly them across the world, especially when that's not really possible, is great. And I want to very much thank the Wix management team to be here with us today. Thank you, Nir. Thank you, Lior and Joe, especially I have to give a special shout out for Joe for stepping in when our technical challenges got to us. Thank you all.

Thank you for having.

Thank you.

Appreciate it.

Thanks, Nat.